QMS (Quality Meat Scotland)

QMS (Quality Meat Scotland) Market Report - September 2012

Cattle

Prices and Supplies

Deadweight cattle prices increased
steadily through August and
surpassed their previous record high
which had been set in July of this
year. In the first week of September,
Scottish abattoirs paid an average of
359.5p/kg for a steer, up 7% yearon-
year. At Scottish auctions, the
average price paid to acquire prime
cattle has fluctuated in a narrow band
around the 200p/kg mark since June.
As September began, prime cattle
were 6.5% more expensive in the
auction ring than a year earlier.

Scottish Deadweight Prices

Prime Cattle - Auction Price

Scottish Auction Prices for Cull Cows

Clean Cattle - Scottish Slaughterings 3 Week
Rolling Average

Having slipped through July, cull cow
prices at Scottish auctions have
lacked direction during August,
trading within a range between
124.5p/kg lwt and 132p/kg lwt since
the start of August. Over the same
period, deadweight cow prices have
traded around the 280p/kg mark.
Deadweight prices have fallen by 9%
since June, while auction values are
7% lower.

DEFRA slaughter statistics for July
showed that although supplies of
prime cattle remained tight relative to
last year at UK abattoirs, they were
down by the smallest margin in the
year to date. Whereas in June,
11.5% fewer prime cattle had been
killed than a year earlier, the deficit
narrowed to 5% in July. Average
carcase weights were at their lightest
since February and this may indicate
that the combination of bad weather
and sharply higher feed costs led
producers to bring cattle forward at a
younger age. The data continued to
suggest that producers are retaining
more heifers for future breeding; the
heifer kill was down by 10% year-onyear
while the steer kill fell just 2% short of July 2011 levels.

Supplies of prime cattle to Scottish abattoirs continued to trail 2011 levels by 10% in July. This matched the decline in the first seven months of 2012. The Scottish data has, like for the UK as a whole, shown a clear divergence between the heifer and steer kills in recent months. While 3% fewer steers were killed in July than a year earlier, heifer throughputs were nearly 20% lower.

For the first time since April, more mature stock were slaughtered in the UK than in the same month of last year. In July, the cow kill was up 6.5% year-on-year; contrasting with the year-to-date figure which is a 4.5% decline. The July increase may well be linked to available forage supplies and the sharp rise in feed costs, which potentially encouraged producers to cull earlier. Nevertheless, the decline in kill between January and July implies that the herd is stabilising or even that farmers are beginning to expand their breeding herds.

In contrast, north of the border there has been little evidence of herd stabilisation within mature stock slaughter data as 3.5% more cows and bulls have been culled this year. Numbers ran 17% ahead of last year in July after being flat in May and June.

Supplies of cattle into Irish export plants remained tight through August. Monthly volumes trailed year earlier levels by 13.5%, slightly below the 16% decline in the first eight months of 2012. Since this was the second successive month during which the rate of decline has slowed, it may well signal that the increased numbers of cattle under one year of age at the time of the December census are now starting to arrive on the market. One contributor to the reduced kill has been Irish producers selling cattle to processors in Northern Ireland which are offering significantly higher prices.

Consumption data from market research firm, Kantar, showed that 5.5% less beef was purchased by UK households in the twelve weeks to August 5 than in the same period of 2011. This compares with a decline of 4.5% in the year to date. Though there were significant declines for stewing cuts, roasting joints, and mince in the twelve week period, steak purchases held firm and more burgers were sold.

UK vs EU27 Price (Steers R3)

UK Beef Exports

UK Beef Imports

Average young bull, heifer and cow prices in the EU rose by approximately 1% in the four weeks to September 9. By contrast, steers became nearly 2% cheaper as falling prices in Ireland pulled the EU average down due to its greater weighting in steer production. Though UK cattle prices are up 6% on the year in Sterling terms, currency movements have resulted in them being 15% higher in Euro terms. However, this has narrowed from 20% over the past month. EU prices are averaging 11-13% higher than last year for prime cattle and 16% higher for cows. Though Irish prices have declined, they are still trading 8% above September 2011 levels.

Export volumes in June were at their
lowest since October 2009. The
7,500t exported was a significant
decline on the same month last year
when 12,200t had been shipped
overseas. Lower domestic production
continued to place downwards
pressure on the volume of product
available for export. Over the first
half of the year (H1), exports totalled
52,900t, a 24% contraction on the
previous year. Ireland was the only
major customer to have imported
significantly more UK beef year-onyear
in H1; though even its volumes
fell behind 2011 levels in June.
Exports to the principal third country
markets of Ghana and Hong Kong
also fell behind 2011 levels in June.

Falling domestic production and
exchange rate movements have
presented trading partners with an
increased opportunity for market access in 2012. As a result, imports rose by 4% in
the first half of the year. However, June shipments trailed year earlier levels by
6.5%. During H1 2012, 1% less fresh beef was imported, but imports of frozen beef
rose 18%. The slowdown in imports during June may have been linked to the
Olympics, as much of the manufacturing beef requirement is likely to have already
been imported; hence the higher level of imports earlier in the year.

News Round Up

Slaughterings of cattle in France fell by 4% year-on-year to 2.48m head during the
first half of 2012 (H1). This produced 639,000t of beef. Within the data there is a
divergence between the slaughter of males and females. Whereas throughputs of
females have fallen 2%, 10% fewer young bulls and 16% fewer steers have been
killed. This has implications for supplies in future years, indicating that breeding
stock numbers will continue to contract. The data also shows how different the
French system is to that in the UK: for every steer that was slaughtered, 4.33 young
bulls were killed. Furthermore, 713,000 calves were slaughtered, yielding 96,000t of
veal.

In Brazil, where beef prices have been subdued for much of the year, cattle farmers
have seen significant price improvement over the past month. Prices have been
driven higher by the combination of tighter supplies and stronger demand. This
demand has come from a substitution effect. Rising feed costs for pig and chicken
farmers have been passed on through the supply chain, pushing up their prices at
the retail level by 9% and 4% during August. At the same time, beef retail prices
moved higher by less than 1%, thereby making it relatively more competitive and
increasing its appeal to consumers.

In spite of the major drought in the US, cow slaughterings have remained lower than 2011 levels by 4%. The decline has been more marked in the beef herd than in the dairy herd with 11% fewer beef cows killed thus far in 2012. This has happened despite 70% of the beef herd being drought affected and more than one third being located in regions of extreme drought. Reduced slaughter numbers can, in part, be attributed to a declining cattle herd, but may also be linked to the drought-induced increased slaughterings of last summer.

Meanwhile, tight supplies and strong demand for cow beef have pushed US cow prices to record seasonal levels. High feed costs coupled with strong cow prices points towards further consolidation in the US cattle herd in 2013.

The USDA has forecast a 4% decline in per capita beef consumption in the US in 2013 to 24.9kg. This forecast is based around the weak economy limiting the willingness of Americans to pay more for beef, which is expected to become more expensive due to tight supplies. A considerable decrease in consumption may have implications for the global cattle trade if major suppliers have to find other customers. However, the proportionate decline in consumption is expected to match the fall in domestic production, thereby implying a lesser impact on import demand.

In Russia, the cattle population grew by 1.5% to 21.4m head in the year to August 1. Within the figures, the breeding herd showed a 2.3% expansion. However, beef production volumes fell by 5% compared to the previous 12 months.

Beef production in Australia rose by 9% year-on-year in July to 175,500t as slaughterings also increased by 9% to 614,300 head. The average carcase weighed 286kg (70kg lighter than the Scottish average). Queensland, Australia’s principal beef producing state, produced 93,100t of beef in July, while New South Wales and Victoria produced a respective 34,800t and 27,100t. Meanwhile, demand for Australian beef has fallen in Russia, Korea and Japan as the strength of the Australian Dollar has made it less competitive against Brazilian product which benefited from falling cattle prices and a weakened currency over this period. However, strong demand from the US for manufacturing beef has offset most of the declines in other markets, leaving exports down only 1% on last year’s levels.

Sheep

Prices and Supplies

Prices at GB price reporting abattoirs
have cooled slightly in recent weeks.
Having traded at 422p/kg dwt in late
August, they opened September at
414p/kg dwt. Prices paid for lambs at
Scottish auctions have fallen by a
greater margin. Whereas in mid
August they traded at 188p/kg lwt,
four weeks later they had decreased
to 170p/kg lwt. Lamb prices have
been trading at a premium of around
5-7% over 2011 levels; though
auction prices fell below year earlier
levels towards the middle of the
month.

Lamb SQQ Auction Price

GB Deadweight R3L Lamb Price

Having trailed year earlier levels since
November, the average proportion of
lambs in the sample achieving at least
an R3L grade moved ahead of last
year in late August. In the first week
of September, 70% of lambs were
graded R3L or better compared with
66% in the same week last year. This will have supported the overall average price
in price reporting abattoirs.

Clean Sheep - Scottish Slaughterings 3 Week
Rolling Average

During July, lamb throughputs at UK abattoirs trailed year earlier levels for a second
month in succession. The decrease intensified in July with numbers down 13% on
the year, compared with June’s 7% decline. Bad weather has meant that lambs
have been much slower to come forward this summer, and those lambs which were
marketed in July were much lighter than usual: carcase weights fell 1.1kg on the
month to 18.5kg; a 23-month low. As a consequence, UK production volumes are
now down by 7% year-on-year, having been running ahead at the end of June.

North of the border, abattoir throughputs contracted to a lesser degree during July
than in the UK as a whole, falling by
8.5% on the year. The average
carcase slipped below 20kg for the
first time since last October, but
weights held up much better than
elsewhere in the UK. Nevertheless,
this was insufficient to prevent
production volumes from moving into
deficit. Having been 2% higher than
in 2011 over the first half of the year
(H1), they now trail by 1.5%.

Kantar data for the twelve weeks to August 5 indicates that demand remains strong.
When compared with the same period last year, purchased volumes rose by 17%.
However, in a note of caution, the four week figure for consumption fell to its lowest
since January, as sales of roasting joints fell by nearly half from the previous four
weeks. This is likely to have been a consequence of an end to the promotions which
had led demand to spike in June. However, consumption of steaks and chops grew
strongly, and overall lamb consumption in the four weeks to August 5 was still up by
13% on the year.

The cull ewe market has weakened significantly since the end of June. Prices have
fallen by 36% since the end of June and were £28 a head lower in the week ended
September 12 than three months before. Although prices tend to decline seasonally
through late summer and into autumn, this year’s slide has been steeper. This has
left ewes trading 13% cheaper than in September 2011.

Ewe prices are lower than last year despite much fewer being killed at UK abattoirs.
July numbers were down 10% on the year and the deficit in the first seven months
stood at 11%. This combination indicates reduced demand. A greater decline in
slaughterings than in the ewe flock provides some evidence that producers may have
begun to rebuild their flocks on the back of four years of rising lamb prices.

Heavy Lambs: GB Vs French Price

At September 9, average heavy lamb
prices in the EU stood at 502c/kg
dwt, up 1.5% on four weeks before.
Since prices had moved in a similar
manner over the same period in
2011, prices have maintained a 9%
premium over last year. However,
this average figure has been pulled
significantly higher by UK lambs
which are showing year-on-year gains
of 17.5%. In sharp contrast, French
producers were paid 2% more than last year while their Irish counterparts have
received 3% more for their lambs.

UK Lamb Exports

A positive development for exporters over the past month has been a rise in the
value of the Euro. Having traded between 78p and 79p for much of August, its value
has increased to 80-81p in September. This change has been driven by the recent
decision of the European Central Bank to introduce measures that could hold the
currency union together if heavily
indebted countries come under
pressure to leave. Nevertheless, the
Euro is still around 7% weaker than
twelve months ago and this has kept
British ex-farm lamb prices relatively
more expensive when quoted in
Euros. The greater than one-third
share of exports in UK production
suggests that currency movements
have limited gains to farmgate prices.

A stronger Sterling than in 2011 does not appear to have had a major effect on UK lamb export volumes. During H1 2012, exports grew by 1.5% year-on-year to 41,600t. Monthly shipments have fluctuated, however, and June sales were down by 2% on the year. 34% of production was exported in H1 2012, up one percentage point on the same period last year.

The UK’s principal customer, France, purchased 6% less lamb in the first half of 2012 than a year earlier, with deliveries totalling 23,000t. Though there were significant declines to most EU markets, Holland and Belgium bought 2% and 5% more respectively. Therefore, it was continued growth outside of the EU which helped keep exports running ahead of 2011 levels. In particular, deliveries to Norway have risen each month this year and are up by a factor of seven over last year.

UK Lamb Imports

The import market stabilised in May and June with shipments down only a fraction on the year, compared with a 14% deficit for H1. The combination of greater supplies and lower prices in New Zealand has been the driver. Imports from New Zealand were 4% higher year-on-year in May and 3% higher in June.

News Round up

EU sheep meat imports fell by 23% year-on-year during H1. Volumes fell to 87,700t from 114,300t in the same period last year and 129,400t in 2010. Of the H1 2012 total, nearly 88% came from New Zealand, up from 85% last year and matching the 2010 figure. Australia, the second largest supplier, maintained a 6% share this year, up from 4% two years ago. Deliveries from South America declined considerably from 7,300t last year to just 3,100t in 2012. The average value of the total H1 2012 imports worked out at €6,800/t (£5,500/t); 9% higher than in the same period of 2011 and almost 40% higher than two years ago. Amidst an economic downturn it is unsurprising that imports have fallen, as hard pressed consumers have traded down to cheaper proteins.

In New Zealand, abattoir throughputs of 12.8m head exceeded last year’s levels by 5% in the first half of the year. Nevertheless, in an historical context this number is very low – indeed five years ago the H1 kill totalled more than 17m head. In terms of production volumes, they have increased by 6% this year as producers took lambs to heavier carcase weights (an average of 18.1kg). Increased weights appear to have been driven by a combination of factors: better weather; export requirements; and the need to maintain cash flows while prices have fallen.

Despite increased production, New Zealand’s lamb export volumes have fallen 2% over the first half of this year. Increased shipments to South East Asia and the Middle East have been unable to offset the decline in deliveries to the EU and North America. The combination of rising production and falling exports implies that cold stores are filling up and this will have exerted significant downwards pressure on producer prices. Over the period, farmgate prices fell by one fifth.

Lamb production has reached record levels in Australia this year. At 255,400t production volumes in the first seven months of the year grew by 14% year-on-year. July figures of 37,200t matched this proportionate increase with slaughterings also up by 14% at 1.6m head. Average carcase weights held steady at 22.65kg in July. July production volumes were underpinned by an 18% increase in Victoria, the largest lamb producing state, which accounted for approximately 45% of Australia’s output. Production has been given a boost by a flock rebuilding phase which took place under the beneficial weather and market conditions of 2010 and 2011.

Pigs

Prices and Supplies

Farmgate pig prices have failed to
follow their historic seasonal trend in
recent weeks. Prices held firm
through the month of August at close
to their July peak before increasing
considerably at the start of
September. This increase took the
DAPP to 151.58p/kg; 4% higher than
it had opened September of last year.
Part of this increase can be attributed
to the reduced availability of cheap
imports as EU prices have increased
significantly in recent weeks.
Industry sources have also revealed
that some processors have offered
producers a supplement in response
to sharply higher feeding costs.

Pigs DWt Adjusted Euro Spec Average - GB

Clean Pigs - Scottish Slaughterings 3 Week
Rolling Average

30kg Weaner Pigs - GB

UK slaughterings of clean pigs rose
by 3% year-on-year in July, matching
the increase in the year-to-date.
Heavier carcase weights and an
increased sow kill helped raise
monthly pigmeat production by 4%
over July 2011 levels.

Scottish processors killed 10% more
prime pigs than a year earlier during
July and this pushed numbers in the
first seven months up 7.5% over the
same period of last year. Whereas in
July 2011 the average carcase
increased in weight from the previous
month, there was no significant
difference this year. This suggests that producers sold pigs at a younger age due to
the spike in feed costs, with rising input costs also possibly giving slaughter numbers
a boost. The year-on-year increase in Scotland still reflects the addition of a
processing plant last September.

Kantar data shows that consumption of pork in the UK declined by 1.5% in the
twelve weeks to August 5. However, this rate of decline has fallen since the spring.
Sales in the four weeks to August 5 were up more than 3.5% year-on-year, driven by
sales of shoulder roasting joints and lower average retail prices.

The rate of decline in weaner prices slowed in August and prices held at a fraction
below £39 a head in the first week of September, down less than 1% on the month.
Weaners are valued considerably lower than in April when they cost £46 a head.
Lower prices are a likely reflection of the decreased confidence that has come as a
result of tightening margins. However, with finished pig prices currently moving
against their historic seasonal trend, there could well be some upside to the weaner
trade in the coming weeks.

Prices for feed grains and soybeans have traded relatively stable in the first half of
September, remaining at similar levels to their late July peak. Markets have now
adjusted to the reduced expectations for the US harvest, while Russia has ruled out
implementing a grain export ban. Soyameal has become slightly cheaper since the
start of the month as the US harvest commenced and prospects of a record Brazilian
harvest in spring 2013 have been factored in to prices. Despite easing slightly, feed
prices have moved further ahead of last year’s levels as they had fallen at a much
quicker pace in September 2011.

A sow price sensitive to the export trade has begun to rebound in recent weeks. The
combination of tight supplies in the EU, as a result of herd consolidation ahead of the
sow stall ban, and improved demand for pigmeat, as a consequence of better
weather conditions, have forced prices higher over the past month. After slipping
to an eleven-month low below 106p/kg dwt in the first half of August, sows averaged
112p/kg dwt at the start of September.

UK vs EU Price (Grade E Pigs)

UK Pork Exports

UK Pork Imports

Prices on the continent have made significant gains in recent weeks. In mid-August
EU prices for grade E pigs had traded
at an average of €1.755/kg dwt, up
4.5% on the month. By the week
ended September 9 this had made
further progress to nearly €1.88/kg
dwt; an increase of 7%. With GB
prices rising at a much slower pace, a
marked improvement in
competitiveness has occurred.
Indeed, in Euro terms, the average
GB grade E pig price is now lower
than the EU average.

After running ahead of 2011 levels in
three of the first four months of 2012
May and June saw pigmeat exports
fall behind. In particular, June
volumes were down by 15% at
10,600t, their lowest monthly total
since January 2011. However, the
strength of deliveries at the start of
the year kept the total volume
exported during H1 1% higher.

Pork imports fell further behind 2011 levels in June with monthly volumes down 19% on the year. In the first half they were down 12.5% at 187,300t. Imports were held down during H1 by the combination of increased domestic production and weak demand.

News Round up

Ahead of the January 1 2013 EU sow stall ban, it is believed that one third of Member States will be non-compliant. The nine countries thought to be in this position are: Austria, Cyprus, Finland, France, Greece, Italy, Poland, Portugal and Slovenia.

Of the twelve Member States that have reported pig numbers as of June 2012, just one showed an increase in its sow herd. The likely explanation behind the losses is that those producers which cannot afford the investment required to meet the new legislation have left the industry. The outlier was Romania, which saw its sow numbers increase by 3% on the year to 360,300 head. By contrast, the major pig producing nations of Germany and Denmark saw modest declines of 1.5% and 2%, respectively, while herds declined by 3% in Spain and France, and by 3.5% in the Netherlands. Moreover, Poland, which had the EU’s fourth largest breeding herd in June 2011, saw its numbers contract by nearly 10% to just under 1.1m head, taking it down to fifth behind France which had just over 1.1m sows. Spain continued to have the largest sow herd, standing at 2.36m head in June, with Germany the only other nation with more than 2m sows (2.16m). Denmark’s herd retained its position as the third largest (1.24m) and the Netherlands stayed in sixth place (1.07m).

Despite declining sow herds across Europe, pigmeat production has held relatively firm this year, falling just 0.5% year-on-year to 11.04m tonnes during H1 2012. Of the six months, EU production was 3% higher than year earlier levels in January; ran slightly ahead in February, April and May; and was 3-4% lower in March and June. That slaughterings have held up relatively well despite reduced sow numbers fits with the narrative that a number of producers have been liquidating their herds ahead of the sow stall ban. However, within the data there is wide variation in production changes. For example, on one hand, Spain’s production volumes were up nearly 5% while French, German, Dutch and Polish production contracted more slowly than their sow herds. On the other hand, Denmark’s pigmeat output decreased by more than three times the rate of its sow numbers (6.5%). Between them, Germany and Spain produced 41% of total EU pigmeat output over the six-month period. Germany alone produced 2.7m tonnes, almost one-quarter of the total.

Brazil grew its pork exports by 3% year-on-year in the first seven months of 2012. Total shipments of 313,000t returned nearly £500m over the period, though this was down 4% on the year as the average value per tonne declined 7%. July export volumes showed a large increase of 23% over the same month last year as better access to the Russian market was granted. Though three Brazilian states remain unable to deliver to Russia, it was Brazil’s principal export destination in July and is in third place for the year-to-date. The end of a trade dispute with Argentina gave further support to sales in July as 2,650t crossed the border. Some recent confidence boosting news for the Brazilian pig industry came courtesy of the commencement of negotiations with Japan over export health certification.

Pig producers all over the world are struggling to cope with the recent spike in feed costs and Canada is no exception. Its second largest pig producer, Big Sky Farms, has gone into receivership as a consequence of losses per pig reaching an average of £28 per slaughter pig sold. Big Sky Farms produces around 1 million pigs annually and if it were to go out of business it would have a major economic impact in the Saskatchewan province where it is based. However, in the meantime, the firm will not downsize its pig herd or workforce while solutions are investigated (the firm is viewed as a highly efficient operator). This is not the first time the firm has faced financial difficulties in recent years; it filed for bankruptcy protection in 2009, having made large losses after feed costs spiked in 2008.